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In Focus
April 27, 2015
Two is the New Three: The US Economic
ECONOMICS Speed Limit
by Avery Shenfeld and Andrew Grantham
Fed “Long-run” Forecasts Move Down (L),
Workforce & Productivity Sluggish (R)
2.0
http://research.cibcwm.
com/res/Eco/EcoResearch.
html
CIBC World Markets Inc.
CIBC
World
Markets
•
Productivity
Workforce
2%
Date of Forecast
1%
0%
2012
Estimate for 2014
Potential GDP
2009
1.5
Potential GDP
(% Yr/Yr)
4%
3%
2.5
1.0
Potential growth can be broken down into
two components—the growth in the size of
FOMC "Long-Term"
GDP Forecast
(% Yr/Yr, Midpoint)
2006
3.0
2003
Fewer Workers…
Chart 1
2000
That’s a sobering reality that the Bank of
Canada has already come to terms with.
The US Fed, for its part, has been ratcheting
down its estimate for long-term trend
growth. Mid-point forecasts from 2011
still set the speed limit at 2.6%, but most
recently a more conservative 2.1% has been
shown (Chart 1, left). But even that may be
a touch too high; last year’s major drop in
unemployment amidst only tepid growth
suggests that 2014 potential growth was
only 1.65%.
Mar'15
In decades past, the US could run at 3% or
even 3½% real growth at full employment.
But the evidence suggests that, in terms of
the long-term growth path, two is the new
three.
Mar'14
Nick Exarhos
(416) 956-6527
[email protected]
The exit of disheartened job seekers from
active search slows work force growth in
economic downturns. But the participation
declines pre-dated the recession, and didn’t
reverse despite strong hiring and rising job
vacancies. That’s largely because much of the
slowdown has been demographically driven;
growth in the “prime-age” 25-55 year-old
population is easing off. More American
baby boomers each year are reaching 60 or
65 and opting to retire. Those under 25 are
staying in school longer, a trend unlikely to
change given the heightened competition
for skilled jobs.
Mar'13
Andrew Grantham
(416) 956-3219
[email protected]
the available workforce at full employment,
and the output per working hour. If past is
prologue, recent years have been signaling
disappointment ahead on both fronts (Chart
1, right).
Apr'12
Benjamin Tal
(416) 956-3698
[email protected]
Equities aren’t a one-year bet, but a play on
a multi-year stream of earnings. That makes
growth beyond 2015 now relevant, and
in the US, it’s the upside limits to growth
that will begin to cap performance. By the
end of this year, the Fed’s estimate of “full
employment”, a 5.0-5.2% jobless rate, looks
to be in sight. If the Fed steers a perfect
track from then on, the economy will be on
the glide path consistent with staying at full
employment, matching what economists call
“potential” growth—the speed limit above
which inflation would become an issue.
Apr'11
Avery Shenfeld
(416) 594-7356
[email protected]
Source: FOMC, CBO, CIBC
PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada
M5J 2S8
Corp
300
Madison
Avenue,
New
York,
NY
10017
•
•
•
Bloomberg @ CIBC
(212)
856-4000,
•
(416) 594-7000
(800)
999-6726
CIBC World Markets Inc.
In Focus—April 27, 2015
Chart 3
Slower Productivity Growth in US and Across OECD
Chart 2
Prime-age Participation Down (L); Workforce
Growth Still Slow Even if Part-rate Recovers (R)
Participation Rate
(25-54, %, 12mma)
1.6
85
82
81
1.2
1.0
0.4
0.8
0.0
0.4
0.6
0.2
0.0
25
21
17
13
09
01
Jan-15
Jan-10
Jan-05
Jan-00
Jan-95
Jan-90
Avg 2010-13
1.4
-0.4
80
Avg 2004-07
1.6
0.8
83
Productivity Growth (% Yr/Yr)
1.8
Forecast
1.2
84
2.0
Workforce Growth
(% Yr/Yr)
05
86
25-54 Part Rate
Recovers to 83%
Unchanged Part-Rates
US
Canada
EZ
UK
OECD
Total
Source: OECD, CIBC
Source: BLS, CIBC
True, there’s still the drop we’ve suffered in participation
rates for prime-age 25-54 year-olds since 2000 (Chart 2,
left). Some of that reflects rising long-term disability.
Incarceration rates also account for about a 0.1% slowing
in the labour force.
History suggests that the investment cycle isn’t likely to
quickly get back on its “normal” track, limiting the pickup in productivity. An IMF study found that investment
spending as a percentage of the existing capital stock
tends to see deeper troughs and slower rebounds for
up to a decade after a financial crisis recession than in
other cycles, such as the one tied to the bursting of the
tech bubble. If anything, this cycle has already seen a bit
more improvement than after those past crises (Chart 5),
perhaps helped by aggressive interest rate settings.
There would still be former construction workers waiting
for homebuilding to recover, or those locked into a
negative-equity mortgage that prevents a move to where
the jobs are. But even if we allowed for a rebound in
the 25-55 part rate, the labour force would settle at
only 0.7% growth (Chart 2, right) due to the ongoing
slowdown in working-age population growth.
Other Factors Slowing Productivity
Productivity can also be shifted by changes in the industry
composition of the economy or technological change.
Rapid growth in a highly productive sector can be
sufficient to tilt the economy-wide averages. That was
the case in the 1990s, owing to the leaps achieved by
… And Less to Show for Them
The other driver of potential GDP—productivity—has also
disappointed. Output per hour decelerates in recessions
as businesses hold on to key workers to avoid turnover
costs, but several years into a recovery, it’s usually back in
full bloom. In the US, and across the OECD, this recovery
has paled relative to the prior one in output per hour
(Chart 3). If that didn’t improve, the non-inflationary
speed limit might hold the US economy to as little as
1½% real growth after 2015. So the forces behind this
deceleration and its longevity is critical for investors.
Chart 4
Capital Stock Not Deepening in this Cycle
4
% Yr/Yr
Hours
3
Capital Input
Capital spending can boost labour productivity by
providing more or superior equipment to work with.
Economists typically focus in on capital deepening, the
extent to which the growth in the net capital input
exceeds the growth in labour input. On that score, this
cycle has been much weaker than those in decades past,
with no capital deepening at all (Chart 4).
2
1
0
Long-Run Avg 1950-2007
2010-14
Source: BEA, San Francisco Fed, CIBC
2
CIBC World Markets Inc.
In Focus—April 27, 2015
years. That could be due to a maturing tech sector that
makes new equipment or software less revolutionary. R&D
spending across the US private sector has picked up in
recent years, from which there could be payoffs in terms
of the next tech wave.
Chart 5
Investment-to-Capital Ratio Not Out of Line with
Recovery from Financial Crisis
2.5
2.0
Investment-to-capital ratio
(Change vs Pre-recession)
1.5
Avg Financial Crises
1.0
One final hurdle for labour productivity is that sectors that
formerly led the economy-wide gains—manufacturing
and information services—have downsized. Total hours
worked in these sectors were still lower in 2014 than
they were in 2006. All of the sectors that have added
labour hours relative to 2006 are those that have trend
(post-1998 average) productivity growth of less than 1%
(Chart 7).
1989-95
0.5
2007-13
0.0
-0.5
-1.0
-1.5
-2.0
t+10
t+9
t+8
t+7
t+6
t+5
t+4
t+3
Source: IMF, BEA, CIBC
t+2
t+1
t
t-1
-2.5
Where to from Here?
Source: IMF, BEA, CIBC
Looking ahead, while we’re still seeing weakness in
capital equipment orders for now, capital spending
should pick-up over the balance of this cycle with an
improvement in economic growth that tightens capacity
use, and raises returns on new investment.
the information and communications tech (ITC) sector.
Real output is measured on a quality-adjusted basis, so
producing a new chip that is miles ahead of the prior
year’s design shows up as a massive productivity gain.
This wasn’t just a US story. Most countries showed a
large, one-time lift to productivity growth in the late1990s (Chart 6), but then a fading of that glory in recent
But many of our findings above suggest that we are
unlikely to attain anything better than a 1½% pace for
output per hour. Post-financial crisis recoveries have
had slower productivity bounces for a decade after the
event. Construction employment is likely to be a major
source of growth as homebuilding comes back to life, a
development that is likely to weigh on a recovery in total
economy output per hour given that sector’s lacklustre
productivity growth trend. There could be an R&D payoff,
but at this point, it’s hard to identify where that would
come. “Big data”, robotics and 3-D printing will aid some
sectors, but there doesn’t appear to be any equivalent to
the lift that came from the start of the internet era.
Chart 6
Chart 7
The result was a big gain in total factor productivity in
the ITC industry—the output generated not by adding
more labour or capital, but by getting more out of the
same inputs. Then, with a lag, there was a second bump
in total factor productivity outside the ITC sector, with
industries that were intensive in the use of information
and communications technology showing the benefit of
adopting new systems to their workplace.
Growth in Aggregate Hours in Typically LowProductivity Sectors
ICT Sector a Key to Productivity Growth in Late 90’s
and Early 00’s
6
Contribution of ICT Capital Deepening to Output
Growth (%-pts)
1.4
1.2
1.0
0.8
Info
5
Serv
US
UK
EZ
Jp
Manf
Chg in Agg.
Hours (mn
2014 vs
2006)
0.4
0.2
-80
-40
Constr
2011
2008
2005
2002
1999
1996
1993
0.0
1990
4
Sectors Gaining
Hours
3
0.6
Source: IMF, CIBC
Labour Productivity*
3
2
1
0
-1
0
40
80
120
-2
Source: BLS, BEA, CIBC
* % chg in GVA minus % chg in aggregate hours worked
CIBC World Markets Inc.
In Focus—April 27, 2015
Additions to labour hours could improve for a short while
as disenchanted prime-age workers return to active job
search, but as we noted, demographic forces will still hold
labour force growth to a 0.7% pace. Add it all up, overall
potential growth looks to run at no better than 2% or so
in the next decade (Chart 8).
Chart 8
Base Case for 2% Potential Growth in Coming
Decade
4.0%
Potential GDP (% Yr/Yr)
CIBC Forecasts
3.5%
2%
Productivity
3.0%
That also implies, however, that the Fed will end up on
a surprisingly shallow path for tightening; our earlier
research found a positive linkage between potential
growth and the neutral rate. Modest growth, but modest
rates will be a mixed bag for equities in the cycle ahead.
2.5%
2.0%
1.5%
2024
2022
2020
2018
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
0.5%
2016
1%
Productivity
1.0%
Source: CBO, CIBC
Source: CBO, CIBC
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